STRENGTHS

 Political and financial support from the Gulf monarchies and western countries

WEAKNESSES

 Poverty (40% of the population) and high unemployment

 Twin deficits

 Low level of foreign exchange reserves

 Banking system subject to sovereign risk

RISK ASSESSMENT

A vigour that is running out of steam in 2016

In 2016, Egypt's economy shows signs of slowdown. The tourism sector already weakened by the attack on the Russian aircraft in October 2015 would continue to contract following the latest incident of civilian plane from the national company on May 2016. The number of tourists decreased by 25% over the first 9 months of the fiscal year 2015/2016 and is expected to weaken in the second half 2016. Tourists nights felt also by 38.5% during the same period. The growth drivers are expected to be the public sector, the distribution and agriculture.

Inflation will remain high and will continue to put pressure on production costs. Moreover persistence of input supply issues, power cuts and lack of foreign currency would continue to plague the sector's prospects. However, Egyptian authorities should continue to support the economy throughout several projects as the Canal of Suez economic zone as outlined in the first speech of Prime Minister Ismail Sherif.

A total of 12 projects have been identified and are scheduled to be implemented in 2016 in different sectors (electricity. desalination. and mining). In the medium term, the repercussions of the Sharm el-Sheikh conference on investment and the development of the gas field discovered by ENI should help increase the potential growth.

Consolidation of government spending

In 2016, the public deficit will remain high as current spending as well as investment spending are expected to grow in order to boost activity. The welfare programmes targeting education and healthcare presented as part of the 2014/2019 five-year development strategy are scheduled to be launched in 2016. The authorities are planning to finance this spending increase through an increase in mandatory contributions associated with a broadening of the tax base. A reform completing the introduction of VAT should be ratified by the new Parliament in 2016. The accumulation of public deficit will keep the debt at a record high level. The return to political stability and the positive signals the authorities have sent to the financial markets have made it easier to obtain external borrowing. A euro-denominated bond issue of $1.5 billion was launched in April 2015.

The external accounts remain in the red

The current account deficit is likely to persist in 2016 because of a fall in tourism revenue that will erode service balance surplus. Net transfers have also decreased. However, trade balance deficit should contract slightly due to a decrease of imports. The greatest improvement should come from higher FDI inflows that increased by 78% from July to December 2015.

Facing a shortage of foreign reserves, Egypt allows its currency to fall. In order to limit the expansion of black market, The Egyptian central bank decided in March 2016 to devalue the pound by 14%. Despite this devaluation, difference between the official exchange rate (8.83 pounds for a dollar) remains above the exchange rate on the black market. In June, Egypt's government approved prison sentences for traders selling foreign currency outside the official exchange rate. However the central bank recently observed a slight improvement in its foreign currency reserves which have exceeded 17 billion.

General elections marked by consensus

Despite a more peaceful climate overall, the upcoming period promises to be challenging for the country. The protests repressed by the police and the army but also the trial against several journalists reinforce latent climate of tension. Egypt, which has based its foreign policy on the fight against terrorism, must cope with the growing threat of jihadists on its own territory in the Sinai in particular, where the Islamic State claimed responsibility for the attack on the Russian civil aircraft, but also on the Libyan border where jihadists movements are gathering strength as a result of the political vacuum in Libya.